ORAL ARGUMENT ON PROMESA STAY

 

 

On January 4, 2017, the First Circuit Court heard oral arguments on the appeals by Peaje, Altair, Brigade, and the Supervisory Control Board. The panel was composed of Judges Thompson, Howard and Kayatta. Judge Howard was one of the Judges in the Franklin California v. Commonwealth case and Judges Thompson and Kayatta were involved in the Wal-Mart v. Commonwealth, the first case that interpreted PROMESA. Many of the arguments were very technical in nature, dealing with the takings clause of the Fifth Amendment as well as lifting of stay in bankruptcy (11 U.C.S. §362) I will concentrate here on the questions posed by the Judges which is the better gauge of what is on their mind.

 

At the start of the argument, Peaje claimed that the burden of proof was on defendants to show, once plaintiff proved it had a lien and that its lien was being depleted, that it had sufficient revenues that would prevent the collateral from being depleted or exhausted. Judge Kayatta asked if there was any evidence of this in the proceedings below and asked that he be told where specifically in the record they were alleged or claimed. Also, Judge Howard asked what flexibility the Court has with PROMESA. None of the answers were very clear. Subsequent filings on these subjects were requested by the Judges.

 

Altair came in and was asked by Judge Kayatta whether the reduction of the collateral was sufficient enough that the debt was in jeopardy. The attorney answered that PR had stated that said payments were not safe, although the island was not using them and had the funds in a discretionary account. She stated that if it was placed in an account that could not be used by the island, there would not be litigation. Judge Kayatta mentioned that the Moratorium Act did not prohibit the transfer of these funds but seems to suspend the obligation. Judge Kayatta again asked who had the burden of proof.

 

When the individual PR defendants took their turn, they mentioned in passing that Judge Besosa’s order was an interlocutory order and not appealable. No judge said a word of this, so probably it will not be an issue. Again Judge Kayatta asked about the depletion of collateral. He was told there was ample collateral but, even if it was exhausted, plaintiffs could sue for damages. Judge Kayatta countered that then they would not be secured but rather unsecured creditors (secured creditors get paid first to the extent of their security in bankruptcy). He also asked for any cases in bankruptcy that held that the depletion of collateral could be allowed if a cause of action for damages was available. No cases were mentioned by defendant and Judge Kayatta mentioned that that was tantamount to closing the barn door after the horse had escaped. He had great difficulty with the proposition that the Government could have 7 months to destroy collateral without the certainty of recovery. Judge Kayatta then asked how do we deal with sec. 405(k) of PROMESA (the section states that it does not affect or discharge an obligation). The answer was lacking in what I think the Judge was asking, to wit, can the Court allow the destruction of a collateral? At this point, Judge Howard asked if there shouldn’t have been a hearing, which of course defendants said no. Judge Thompson followed up and asked if there was evidence of a cushion for the collateral.

 

Defendants kept hammering that adequate protection, the standard used by Judge Besosa to decide on the lifting of the stay, was incorrect; that PROMESA did not adopt this standard in Title IV. They want a balancing of equities but, as plaintiffs stated in the rebuttal, under that standard, there never would be a lifting of the stay. The Employee Retirement Fund claimed that non-governmental contributions (municipalities) to the fund were enough to maintain the collateral.

 

The Financial Oversight Board claimed that it did not file an answer to the complaints because it did not want to state its position on the constitutional and statutory claims made by plaintiffs before they sat at the negotiating table. Again, the Board claims it has the statutory mission to conduct said negotiations.

 

In rebuttal, Peaje said the burn rate of the collateral was 100% and their experts would state there was a likelihood there would not be sufficient funds in the future to maintain the collateral. As to the ERS non-governmental contributions, Altair said defendants said they were uncertain in the Fiscal Plan.

 

What can we conclude from this? The Judges are disturbed by the lack of hearing. There is evidence that the issue of depletion of the collateral is vital to the determination and that would be done in an evidentiary hearing. In addition, sec. 405(e)(2) requires a hearing. Hence, I believe that the Judges will reverse the Peajes decision by Judge Besosa and require a hearing. This could be important since it is likely that the stay will be extended by the Board to May 1, 2017. As to the other issues, I did not get a feeling one way or the other of what is on the Judges minds. Let’s wait and see. Since PROMESA requires that the issues be treated in an expedited manner, we could expect a decision by the end of the month or sooner.

 

 

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